Financial Planning for Individuals in Blended Families

,
blended-families

According to census figures, over 1300 blended families are created every day… and almost 50% of Americans have at least one step relative, based on findings from the Pew Research Center.  So for many Americans, step families have become the norm.  And apart from the usual issues of managing everyone’s schedules regarding custody of the children, and dealing with the personality dynamics involved when different families come together, there are also a host of financial issues that have to be addressed in these types of situations.  Here are some of the most common issues that come up:

  • Whether to get legally married: One of the major decisions to consider is whether to legally “tie the knot”, which carries a host of ramifications.  For one thing, under ERISA law your spouse must be the beneficiary of your 401k plan at work, unless they sign off on a waiver.  In contrast, this is not the case with your IRA accounts or other investment accounts, where you are free to name whoever you like as beneficiary.  This could also factor into the decision of whether to roll over a 401k into an IRA, because doing so gives the owner more rights to name beneficiaries than leaving the assets in the 401k after you leave a job.

Another huge ramification of getting legally married is that you’ll be subject to asset division rules if the new marriage doesn’t last forever.  Statistics show that 2/3 of second marriages also end in divorce.  If you get married a second time, from that date forward all assets that you accumulate will be considered marital property, which means that your spouse will be entitled to half in the event of another divorce.  Not only that, but most jurisdictions still enforce spousal support, which generally means that the higher earning spouse will have to share some of their income with the lower earning spouse, even AFTER the divorce…typically for one additional year for every three years of marriage.  In contrast, this will not be an issue if there is no legal marriage, because Ohio stopped recognizing common law marriages after 1991.

  • What to do with the house:  this is often a very contentious issue with blended families.  If you put the house title as joint with right of survivorship to keep it out of probate, you’re giving the joint owner immediate and full rights to the house – it’s the same as gifting them half the house right away.  This would not be a good solution if the goal is for each spouse’s children to inherit their half of the house… in that case, it might be better to set up a trust to determine what happens to the house if one of the spouses passes away, how long the other spouse can continue to live there, etc.  These issues can get very complicated very quickly.
  • What to do with investment/financial accounts:  Here again, things can get very complicated in a hurry.  If you put these accounts in joint title, you’re essentially giving a gift of half the account to the other owner, immediately.  If this isn’t the goal, another option to consider using a Transfer on Death Designation…this will keep the account out of probate and get it to the other spouse in case the owner dies, but does not give the other spouse any immediate ownership in the account before the death of the owner.
  • Updating beneficiaries on life insurance policies and IRAs: If you’ve had life insurance policies and IRAs for many years, it’s very easy to forget to update the beneficiaries as circumstances change, as in the case of newly blended families.  The last thing you want is to continue to name an ex spouse as beneficiary and thereby create a disaster if you pass away unexpectedly without having updated these forms to reflect your new wishes.

As you can see, blended families can face a host of financial planning issues that can become very complex, very quickly !!  If you’re in this situation, make sure you sit down with your financial or legal advisor and carefully go through these questions to make sure that your financial affairs are put in good order to reflect your new circumstances.